CUSTODIAL AGREEMENT & DISCLOSURE STATEMENT€¦ · No part of the custodial account funds may be...

CUSTODIAL AGREEMENT & DISCLOSURE STATEMENT

Copyright 1998-2011, PenServ Plan Services, Inc. Control 05702FTCO.doc (11-11)

Form 5305-EA Coverdell Education Savings Custodial Account (Rev. October 2010) (Under Section 530 of the Internal Revenue Code) Department of the Treasury Internal Revenue Service

Article I 1.01 The custodian may accept additional cash contributions provided the designated beneficiary has not attained the age of 18 as of the date such

contributions are made. Contributions by an individual contributor may be made for the tax year of the designated beneficiary by the due date of the beneficiary's tax return for that year (excluding extensions). Total contributions that are not rollover contributions described in section 530(d)(5) are limited to $2,000 for the tax year. In the case of an individual contributor, the $2,000 limitation for any year is phased out between modified adjusted gross income (AGI) of $95,000 and $110,000. For married individuals filing jointly, the phase-out occurs between modified AGI of $190,000 and $220,000. Modified AGI is defined in section 530(c)(2).

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Article II No part of the custodial account funds may be invested in life insurance contracts, nor may the assets of the custodial account be commingled with other property except in a common trust fund or a common investment fund (within the meaning of section 530(b)(1)(D)).

Article III

Any balance to the credit of the Designated Beneficiary on the date on which he or she attains age 30 shall be distributed to him or her within 30 days of such date.

Any balance to the credit of the Designated Beneficiary shall be distributed within 30 days of his or her death unless the designated death beneficiary is a family member of the Designated Beneficiary and is under the age of 30 on the date of death. In such case, that family member shall become the Designated Beneficiary as of the date of death.

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Article IV The Depositor shall have the power to direct the Custodian regarding the investment of the above-listed amount assigned to the custodial account (including earnings thereon) in the investment choices offered by the Custodian. The Responsible Individual, however, shall have the power to redirect the Custodian regarding the investment of such amounts, as well as the power to direct the Custodian regarding the investment of all additional contributions (including earnings thereon) to the custodial account. In the event that the Responsible Individual does not direct the Custodian regarding the investment of additional contributions (including earnings thereon), the initial investment direction of the Depositor also will govern all additional contributions made to the custodial account until such time as the responsible individual otherwise di rects the Custodian. Unless otherwise provided in this agreement, the Responsible Individual also shall have the power to direct the Custodian regarding the administration, management, and distribution of the account.

Article V

The "Responsible Individual" named by the Depositor shall be a parent or guardian of the Designated Beneficiary. The custodial account shall have only one Responsible Individual at any time. If the Responsible Individual becomes incapacitated or dies while the Designated Beneficiary is a minor under state law, the successor Responsible Individual shall be the person named to succeed in that capacity by the preceding Responsible Individual in a witnessed writing or, if no successor is so named, the successor Responsible Individual shall be the Designated Beneficiary's other parent or successor guardian. Unless otherwise directed by checking the option in the Adoption Agreement, at the time that the Designated Beneficiary attains the age of majority under state law, the Designated Beneficiary becomes the Responsible Individual. If a family member under the age of majority under state law becomes the Designated Beneficiary by reason of being a named death beneficiary, the Responsible Individual shall be such Designated Beneficiary's parent or guardian.

If elected in the Adoption Agreement, the Responsible Individual shall continue to serve as the Responsible Individual for the custodial account after the Designated Beneficiary attains the age of majority under state law and until such time as all assets have been distributed from the custodial account and the custodial account terminates. If the Responsible Individual becomes incapacitated or dies after the Designated Beneficiary reaches the age of majority under state law, the Responsible Individual shall be the Designated Beneficiary.

Article VI

If elected in the Adoption Agreement the Responsible Individual may change the beneficiary designated under this agreement to another member of the Designated Beneficiary's family described in section 529(e)(2) in accordance with the Custodian's procedures.

Article VII

The Depositor agrees to provide the Custodian with all information necessary to prepare any reports required by section 530(h).

The Custodian agrees to submit to the Internal Revenue Service (IRS) and Responsible Individual the reports prescribed by the IRS.

Article VIII Notwithstanding any other articles which may be added or incorporated, the provisions of Articles I through III will be controlling. Any additional articles inconsistent with section 530 and the related regulations will be invalid.

Article IX

This agreement will be amended as necessary to comply with the provisions of the Code and the related regulations. Other amendments may be made with the consent of the Depositor and Custodian whose signatures appear on the Adoption Agreement.

Article X

Applicable Law: This Custodial Agreement is subject to all applicable federal laws and regulations and shall be governed by and construed under the applicable laws of the state of South Dakota, where the Custodian is organized. The term Designated Beneficiary shall also include the Depositor, Responsible Individual and Death Beneficiary, where appropriate throughout this Agreement. Any lawsuit filed against or by Custodian or Administrator shall only be instituted in the district or county courts of Minnehaha County, South Dakota, where Custodian maintains its principal office, and the Depositor, Designated Beneficiary and Responsible Individual agree to submit to such jurisdiction both in connection with any such lawsuit which the Depositor, Designated Beneficiary or Responsible Individual may file and in connection with any lawsuit which Custodian or Administrator may file against the Depositor, Designated Beneficiary or Responsible Individual.

Custodian and Administrator: (a) The Custodian for the Custodial Account is Midland Trust. (b) The Administrator for the Custodial Account is Midland IRA, Inc., a Florida corporation.


10.3 Agent for the Custodian: The Custodian has appointed the Administrator to act as agent for the Custodian for the purpose of performing administrative or other custodial-related services with respect to the Custodial Account for which the Custodian otherwise has responsibility under this Agreement. All limitations of duties to the Depositor, Designated Beneficiary and Responsible Individual, and releases or indemnifications of the Custodian by the Depositor, Designated Beneficiary and Responsible Individual in this Agreement shall apply equally to the Administrator. The Administrator shall perform duties on behalf of the Custodian which include, but are not limited to, executing applications or adoption agreements, transfers, stock powers, escrow accounts, purchase agreements, notes, deeds, conveyances, liens, placing assets or liabilities in the Administrator’s name for the benefit of the Depositor to provide administrative feasibility for such transactions, depositing contributions, and income, paying liabilities and distributions and government reporting for Depositors who have established a Custodial Account with the Custodian.

10.4 Annual Accounting: The Custodian shall, at least annually, provide the Designated Beneficiary (or the Responsible Individual, if applicable) with an

accounting of such Designated Beneficiary's account. Such accounting shall be deemed to be accepted by the Designated Beneficiary, if the Designated Beneficiary (or Responsible Individual) does not object in writing within 60 days after the mailing of such accounting.

10.5 Amendment: The Depositor, Designated Beneficiary and Responsible Individual irrevocably delegates to the Custodian the right and power to

amend this Custodial Agreement. Except as hereafter provided, the Custodian will give the Designated Beneficiary (or Responsible Individual) 30 days’ prior written notice of any amendment. In case of a retroactive amendment required by law, the Custodian will provide written notice to the Designated Beneficiary (or Responsible Individual) of the amendment within 30 days after the amendment is made, or if later, by the time that notice of the amendment is required to be given under regulations or other guidance provided by the IRS. The Depositor, Designated Beneficiary and Responsible Individual shall be deemed to have consented to any such amendment unless the Designated Beneficiary (or Responsible Individual) notifies the Custodian to the contrary within 30 days after notice to the Designated Beneficiary (or Responsible Individual) and requests a distribution or transfer of the balance in the account.

10.6 Resignation and Removal of Custodian:

(a) The Custodian may resign and appoint a successor trustee or custodian to serve under this agreement or under another governing agreement selected by the successor trustee or custodian by giving the Designated Beneficiary (or Responsible Individual) written notice at least 30 days prior to the effective date of such resignation and appointment, which notice shall also include or be provided under separate cover a copy of such other governing instrument, if applicable, and the related disclosure statement. The Designated Beneficiary (or Responsible Individual) shall then have 30 days from the date of such notice to either request a distribution of the entire account balance or designate a different successor trustee or custodian and notify the Custodian of such designation. If the Designated Beneficiary (or Responsible Individual) does not request distribution of the account balance or notify the Custodian of the designation of a different successor trustee or custodian within such 30 day period, the Designated Beneficiary (or Responsible Individual) shall be deemed to have consented to the appointment of the successor trustee or custodian and the terms of any new governing instrument, and neither the Designated Beneficiary (or Responsible Individual) nor the successor shall be required to execute any written document to complete the transfer of the account to the successor trustee or custodian. The successor trustee or custodian may rely on any information, including beneficiary designations, previously provided by the Designated Beneficiary (or Responsible Individual) to the Custodian.

(b) The Designated Beneficiary (or Responsible Individual) may at any time remove the Custodian and replace the Custodian with a successor trustee or custodian of the Designated Beneficiary's (or Responsible Individual’s) choice by giving 30 days’ notice of such removal and replacement. The Custodian shall then deliver the assets of the account as directed by the Designated Beneficiary (or Responsible Individual). However, the Custodian may retain a portion of the assets of the Custodial Account as a reserve for payment of any anticipated remaining fees and expenses, and shall pay over any remainder of this reserve to the successor trustee or custodian upon satisfaction of such fees and expenses.

(c) The Custodian may resign and demand that the Designated Beneficiary (or Responsible Individual) appoint a successor trustee or custodian of this Custodial Account by giving the Designated Beneficiary (or Responsible Individual) written notice at least 30 days prior to the effective date of such resignation. The Designated Beneficiary (or Responsible Individual) shall then have 30 days from the date of such notice to designate a successor trustee or custodian, notify the Custodian of the name and address of the successor trustee or custodian, and provide the Custodian with appropriate evidence that such successor has accepted the appointment and is qualified to serve as trustee or custodian of a Coverdell ESA. (1) If the Designated Beneficiary (or Responsible Individual) designates a successor trustee or custodian and provides the Custodian

evidence of the successor's acceptance of appointment and qualification within such 30-day period, the Custodian shall then deliver all of the assets held by the Custodian in the account (whether in cash or personal or real property, wherever located, and regardless of value) to the successor trustee or custodian.

(2) If the Designated Beneficiary (or Responsible Individual) does not notify the Custodian of the appointment of a successor trustee or custodian within such 30 day period, then the Custodian may distribute all of the assets held by the Custodian in the account (whether in cash or personal or real property, wherever located, and regardless of value) to the Designated Beneficiary (or Responsible Individual), outright and free of trust, and the Designated Beneficiary (or Responsible Individual) shall be wholly responsible for the tax consequences of such distribution.

In either case, the Custodian may expend any assets in the account to pay expenses of transfer (including re-registering the assets and preparation of deeds, assignments, and other instruments of transfer or conveyance) to the successor trustee or custodian or the Designated Beneficiary (or Responsible Individual), as the case may be. In addition, the Custodian may retain a portion of the assets as a reserve for payment of any anticipated remaining fees and expenses. Upon satisfaction of such fees and expenses, the Custodian shall pay over any remainder of the reserve to the successor trustee or custodian or to the Designated Beneficiary (or Responsible Individual), as the case may be.

(d) Administrator may at any time select a qualified successor custodian by giving the Designated Beneficiary (or Responsible Individual) and Custodian written notice at least 30 days prior to the effective date of such appointment, which notice shall also include or be provided under separate cover a copy of such other governing instrument, if applicable, and the related disclosure statement. The Designated Beneficiary (or Responsible Individual) shall then have 30 days from the date of such notice to either request a distribution of the entire Custodial Account balance or designate a different successor trustee or custodian and notify the Custodian and Administrator of such designation. If the Designated Beneficiary (or Responsible Individual) does not request distribution of the Custodial Account balance or notify the Administrator of the designation of a different successor trustee or custodian within such 30 day period, the Designated Beneficiary (or Responsible Individual) shall be deemed to have consented to the appointment of the successor custodian and the terms of any new governing instrument, and neither the Designated Beneficiary (or Responsible Individual) nor the successor shall be required to execute any written document to complete the transfer of the Custodial Account to the successor custodian. The successor custodian may rely on any information, including beneficiary designations, previously provided by the Designated Beneficiary (or Responsible Individual) to the Custodian.

10.7 Custodian's and Administrator’s Fees and Expenses:

(a) The Depositor, Designated Beneficiary and Responsible Individual agree to pay the Custodian any and all fees specified in the Custodian's current published fee schedule for establishing and maintaining this Custodial Account, including any fees for distributions from, transfers from, and terminations of this Custodial Account. The Custodian may change its fee schedule at any time by giving the Depositor, Designated Beneficiary or Responsible Individual 30 days’ prior written notice.


(b) The Depositor, Designated Beneficiary and Responsible Individual agree to pay any expenses incurred by the Custodian or theAdministrator in the performance of its duties in connection with the account. Such expenses include, but are not limited to, administrativeexpenses, legal fees, accounting fees, regulatory fees and any taxes or assessments of any kind whatsoever that may be levied withrespect to such account.

(c) All such fees, taxes, and other administrative expenses charged to the account shall be collected either from the assets in the account orfrom any contributions to or distributions from such account if not paid by the Depositor, Designated Beneficiary or Responsible Individual,but the Depositor, Designated Beneficiary and Responsible Individual shall be responsible for any deficiency.

(d) In the event that for any reason the Custodian is not certain as to who is entitled to receive all or part of the assets in the CustodialAccount, the Custodian reserves the right to withhold any payment from the Custodial Account, to request a court ruling to determine thedisposition of the Custodial assets, and to charge the Custodial Account for any expenses incurred in obtaining such legal determination.

(e) The Custodian shall be entitled to receive, from the assets held in the Custodial Account, a fee equal in amount to all income that isgenerated from any Undirected Cash (defined as any cash in the Custodial Account not invested pursuant to a specific investmentdirection by Depositor) which has been deposited by Custodian into FDIC or other United States government insured financialinstitutions, United States government securities, or securities that are insured or guaranteed by the United States government, asprovided in Section 9.1(b) below. Custodian’s fees from the Undirected Cash in the Custodial Account are associated with cashmanagement activities, including, but not limited to, account maintenance, depository bank selection, transaction processing, sub-accounting, record keeping, and other services performed under the terms of this Agreement. Custodian retains the right, but doesnot have the obligation, to reduce this fee by rebating a portion of the fee into the Custodial Account. The Depositor agrees that thisfee may be retained by the Custodian as compensation for the services provided by Custodian under this Agreement. The Custodianmay pay all or an agreed portion of this fee to the Administrator as agreed between the Custodian and the Administrator. Custodianmakes no representations or warranties as to the financial status of any depository bank or its ability to satisfy its obligations to theDepositor and that the status of a depository bank as a “well-capitalized” bank by the FDIC at any particular time does not mean thatit will be so at any time in the future. The Custodian reserves the right to change all or part of the Custodial Fee Schedule at itsdiscretion with 30 days’ advance written notice to the Depositor. Custodian has offered two separate options for uninvested cash toits Depositors. The Depositor must choose if they want their uninvested cash deposited into Option Two (Midland Cash), otherwisethe uninvested cash will default to being deposited into the Option One (Midland One) pooled account. Midland One automaticallymakes deposits to and withdrawals from deposit accounts only into pooled cash account investing in highly rated Bank Money MarketAccounts, US Bank Certificates of Deposits, US Treasuries and other Government backed demand deposits. The Depositor willmonthly receive a percentage of the interest or fees generated on the sub account and Midland Trust Company. Midland TrustCompany will determine this percentage monthly. Midland Cash is a non-interest bearing pooled money market account at variousFDIC-insured depository institutions. These funds are FDIC Insured up to the current regulatory amounts. This account pays nointerest. You must elect to be in this pooled fund by checking the box on the fee disclosure. Custodian has sole discretion, withoutany further approval from the Depositor, as to which third party financial organizations to deposit the Depositor’s uninvested cash. TheDepositor hereby indemnifies and agrees to hold such financial organization(s) harmless from following the directions received fromthe Custodian on the Depositor’s behalf including, but not limited to, honoring checks drawn on the Depositor’s portion of the pooledcustodial accounts that are written by the Custodian and agrees that the duties and powers described herein that are exercised by theCustodian are ministerial in nature and will not operate to cause the Custodian to become a fiduciary with respect to the Depositor’saccount.

(f) In addition to any portion of the Custodian’s fee that the Administrator receives from the Custodian as provided in Section 10.07(e), theAdministrator shall be entitled to fees for account opening, asset purchases and sales, distributions, transfers, terminations, and annualadministration of the Custodial Account, along with other miscellaneous fees, as disclosed in a fee schedule provided by the Administrator to the Depositor, Designated Beneficiary and Responsible Individual. The Administrator may change its fee schedule at any time by givingthe Depositor, Designated Beneficiary or Responsible Individual 30 days prior written notice. If payment is not received within thirty (30)days from the due date reflected on an invoice, a past due notice will be mailed to the Depositor, Designated Beneficiary or ResponsibleIndividual and a late fee equal to the lower of (a) 1.5% of the outstanding invoice for every month or partial month that the invoice isoutstanding or (b) the maximum late penalty permitted under the state law where the Administrator is organized, shall be assessed to theCustodial Account. Additionally, assets may be liquidated from the account, without notice, for any outstanding fee which has not beenpaid. If fees are not paid within thirty (30) days after Administrator has mailed the past due notice, Administrator will begin the process ofclosing the Custodial Account. Any asset distributed directly to the Designated Beneficiary (or Responsible Individual) as part of closingthe Custodial Account will be reported to the IRS on Form 1099-Q and may subject the Designated Beneficiary (or Responsible Individual)to possible taxes and penalties. Accounts with past due fees, unfunded accounts, and accounts with zero value will continue to incuradministration fees until such time as Depositor, Designated Beneficiary or Responsible Individual notifies Administrator (on a formprescribed by Custodian) of Depositor’s, Designated Beneficiary’s, or Responsible Individual’s intent to close the account or untilCustodian resigns.

10.8 Withdrawal Requests: All requests for withdrawal, distribution, or payment from the account shall be in writing on a form provided and accepted by the Custodian. Such written request must also specify the reason for the withdrawal, distribution, or payment and the desired method or form of withdrawal, payment, or distribution.

10.9 Responsibilities: The Depositor, Designated Beneficiary and Responsible Individual represent that all information and instructions given to the Custodian by the Depositor, Designated Beneficiary and Responsible Individual is complete and accurate and that the Custodian shall have no responsibility for any incomplete or inaccurate information provided by the Depositor, Designated Beneficiary or Responsible Individual. The Depositor, Designated Beneficiary and Responsible Individual agree to be responsible for all tax consequences arising from contributions to and distributions from this Custodial Account and acknowledges that no tax advice has been provided by the Custodian.

10.10 Change of Designated Beneficiary: (a) If elected in the Adoption Agreement, while the Designated Beneficiary is a minor or otherwise lacks legal capacity, the Resp onsible

Individual may at any time change the Designated Beneficiary for this Coverdell ESA to any member of the family under the age of 30 ofthe original Designated Beneficiary or direct the Custodian to roll over or transfer the funds in this Coverdell ESA to a Coverdell ESA forany member of the family under the age of 30 of the original Designated Beneficiary. If elected in the Adoption Agreement, when theDesignated Beneficiary has legal capacity, the Designated Beneficiary may at any time change the Designated Beneficiary for thisCoverdell ESA to any member of the family under the age of 30 of the original Designated Beneficiary or direct the Custodian to roll overor transfer the funds in this Coverdell ESA to a Coverdell ESA for any member of the family under the age of 30 of the original Designated Beneficiary.

(b) Any change of Designated Beneficiary under this Coverdell ESA agreement shall not be treated as a distribution, if the new DesignatedBeneficiary is a Member of the Family (as defined under section 10.12) and such new Designated Beneficiary has not attained the age of30, as of the date of such change.

(c) Notwithstanding Section 3.01, a new Designated Beneficiary may be named within 30 days after the Designated Beneficiary attains theage of 30.


10.11 Designated Beneficiary's Minority or Incapacity: The following provisions apply while the Designated Beneficiary is a minor or lacks legal

capacity:

(a) The Responsible Individual shall have, to the exclusion of the Designated Beneficiary, all of the rights, powers, and responsibilitiesgranted to the Designated Beneficiary under this Custodial Agreement, including, without limitation, the right to receive accountingsand notices of amendment and resignation, the power to remove and replace the Custodian, the power to direct investments, thepower to request withdrawals, distributions, and payments, and the power to direct a rollover or transfer to the trustee or custodian ofa Coverdell ESA for the Designated Beneficiary or another member of the family of the Designated Beneficiary.

(b) In the event the Responsible Individual dies, becomes disabled, or otherwise fails or refuses to act and no successor ResponsibleIndividual has been appointed, or no duly appointed Responsible Individual is willing or able to serve, then a parent of the Designated Beneficiary or the legal guardian or conservator of the estate of the Designated Beneficiary may appoint a Responsible Individual in writing on a form acceptable to and filed with the Custodian.

10.12 Member of the Family: The term "member of the family of the Designated Beneficiary" includes the Designated Beneficiary's: spouse, children,

grandchildren, sibling, parent, niece or nephew, son-in-law, daughter-in-law, father-in-law, mother-in law, brother-in-law, or sister-in-law; and

spouses of the foregoing. A first cousin, but not his or her spouse, is also a family member.

10.13 Designated Death Beneficiary: In accordance with Article 3.02 of this Agreement and if permitted by the Custodian, the Depositor, Designated

Beneficiary or Responsible Individual shall have the right to name a Designated Death Beneficiary(ies) on a form provided by and acceptable to

the Custodian. In the event of the Designated Beneficiary's death, such Designated Death Beneficiary(ies) shall be entitled to the remaining

interest in the account. If any such Designated Death Beneficiary is not a member of the family (as defined in Article 10.12 of this Agreement),

the remaining balance in the account shall be distributed to the Designated Death Beneficiary within 30 days of the death of the Designated

Beneficiary. If any such Designated Death Beneficiary is a member of the family (as defined in Article 10.12 of this Agreement), the remaining

balance in the account shall become the Coverdell ESA of the Designated Death Beneficiary. If no death beneficiary designation is in effect or

if none of the Death Beneficiaries survive the Designated Beneficiary, the remaining balance will be paid to the estate of the Designated

Beneficiary.

Article XI SELF-DIRECTED COVERDELL ESA PROVISIONS

11.1 Investment of Contributions: (a) At the direction of the Designated Beneficiary (or the direction of the Depositor or the Responsible Individual, whichever applies), the

Custodian shall invest all contributions to the Custodial Account and earnings thereon in investments that are acceptable to theCustodian, and that are considered administratively feasible by the Custodian, which may include but are not limited to marketable securities traded on a recognized exchange or "over the counter" (excluding any securities issued by the Custodian), certificates ofdeposit, real estate, deeds of trust, mortgages, unsecured notes, limited partnerships, limited liability companies, private stock, otherprivate placement offerings, and other investments to which the Custodian consents, in such amounts as are specifically selected and specified by the Designated Beneficiary (or the direction of the Depositor or the Responsible Individual, whichever applies) in ordersto the Custodian in such form as may be acceptable to the Custodian, without any duty to diversify and without regard to whether suchproperty is authorized by the laws of any jurisdiction as a trust investment. The Custodian shall be responsible for the execution ofsuch orders and for maintaining adequate records thereof. However, if any such orders are not received as required, or, if received,are unclear in the opinion of the Custodian, or if there is insufficient Undirected Cash in the Custodial Account to comply with such orders, all or a portion of the contribution may be held uninvested without liability for loss of income or appreciation, and without liability for interest pending receipt of such orders or clarification, or the contribution may be returned. The Custodian and the Administratorshall have no duty other than to follow the written investment directions of the Designated Beneficiary (or the direction of the Depositoror the Responsible Individual, whichever applies), and shall be under no duty to question said instructions and shall not be liable forany investment losses sustained by the Designated Beneficiary (or Responsible Individual) under any circumstances.

(b) The Depositor, Designated Beneficiary and Responsible Individual hereby acknowledges and agrees that Custodian will deposit allUndirected Cash in the Custodial Account into pooled deposit accounts at one or more FDIC or other United States governmentinsured institutions or in United States government securities or in securities that are insured or guaranteed by the United Statesgovernment pending further investment direction by the Depositor, Designated Beneficiary or Responsible Individual. All income generated by Undirected Cash in Custodian’s pooled deposit accounts shall be retained by Custodian as fees, as described inparagraph 10.07(e) above. Depositor, Designated Beneficiary and Responsible Individual authorize Custodian to transfer anyUndirected Cash in the Custodial Account into any FDIC insured financial institution or in United States government securities or insecurities that are insured or guaranteed by the United States government without any further approval or direction by the Depositor,Designated Beneficiary or Responsible Individual.

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Indemnification: The Custodian and Administrator shall have no duty other than to follow the written instructions of the Depositor, Designated Beneficiary or Responsible Individual, and shall be under no duty to question said instructions and shall not be liable for any investment losses sustained by the Depositor, Designated Beneficiary and Responsible Individual under any circumstances. By performing services under this Agreement, the Custodian and the Administrator are acting as the agent of Depositor, Designated Beneficiary and Responsible Individual, and nothing in this Agreement shall be construed as conferring fiduciary status on the Custodian or the Administrator. Depositor, Designated Beneficiary and Responsible Individual agree to indemnify and hold harmless the Custodian and the Administrator from any and all claims, damages, liability, actions, costs, expenses (including reasonable attorneys’ fees) and any loss to the Custodial Account, to the Depositor, Designated Beneficiary and Responsible Individual or to the Designated Death Beneficiary(ies) as a result of any action taken (or omitted to be taken) pursuant to and/or in connection with any investment transaction directed by Depositor, Designated Beneficiary and Responsible Individual or their investment advisor or resulting from serving as the Custodian or the Administrator, including, without limitation, claims, damages, liability, actions and losses asserted by the Depositor, Designated Beneficiary and Responsible Individual or the Designated Death Beneficiary(ies).

Registration: Custodian reserves the right to appoint Administrator to act as the nominee of Custodian for the purposes of holding title to assets of investors. The same Administrator may be the nominee of the Custodian with respect to the holding of assets of other investors whether or not held under agreements similar to this one or in any capacity whatsoever; and the Custodian may commingle the assets so held to the extent permitted by law. However, the Custodial Account and each other account or asset so held shall each be separate and distinct; a separate account therefore shall be maintained by the Custodian (or by the Administrator on behalf of the Custodian). The assets of the Custodial Account may be held by the Custodian in individual or bulk segregation


either in the Custodian's vaults or vaults of the Custodian’s agent or through brokerage accounts of entities permitted to hold assets of the applicable type under the Securities Exchange Act of 1934 or the Commodities Exchange Act.

11.4 Investment Advisor: The Designated Beneficiary (or Depositor or Responsible Individual) may appoint an Investment Advisor, qualified under

Section 3(38) of the Employee Retirement Income Security Act of 1974, to direct the investment of the Custodial Account or any specified portion of the Custodial Account. The Designated Beneficiary (or Depositor or Responsible Individual) shall notify the Custodian in writing of any such appointment by providing the Custodian a copy of the instruments appointing the Investment Advisor and evidencing the Investment Advisor's acceptance of such appointment, an acknowledgment by the Investment Advisor that it is a fiduciary of the account, and a certificate evidencing the Investment Advisor's current registration under the Investment Advisor's Act of 1940. The Custodian shall comply with any investment directions furnished to it by the Investment Advisor, unless and until it receives written notification from the Designated Beneficiary (or Depositor or Responsible Individual) that the Investment Advisor's appointment has been terminated. The Custodian and the Administrator shall have no duty other than to follow the written investment directions of such Investment Advisor and shall be under no duty to question said instructions, and the Custodian and Administrator shall not be liable for any investment losses sustained by the Depositor, Designated Beneficiary and Responsible Individual or the Designated Death Beneficiary(ies) as a result of following the written investment directions of the Designated Beneficiary’s (or Depositor’s or Responsible Individual’s) Investment Advisor.

11.5 No Investment Advice: The Depositor, Designated Beneficiary and Responsible Individual acknowledge and agree that the Custodian and the

Administrator do not provide or assume responsibility for any tax, legal or investment advice with respect to the investments and assets in the Custodial Account and shall not be liable for any loss which results from the Designated Beneficiary’s (or the Depositor’s or the Responsible Individual’s) exercise of control over the Custodial Account. The Depositor, Designated Beneficiary and Responsible Individual, and the Designated Death Beneficiary(ies) release, indemnify and agree to hold the Custodian and the Administrator harmless in the event that any investment or sale of the assets in the Custodial Account pursuant to a direction by the Designated Beneficiary, the Depositor, the Responsible Individual or their Investment Advisor violates any federal or state law or regulation or otherwise results in a disqualification, penalty, tax or fine imposed upon the Custodian, the Administrator, the Designated Beneficiary, the Depositor, the Responsible Individual, the Designated Death Beneficiary(ies) or the Custodial Account.

11.6 Prohibited Transactions: The Depositor, Designated Beneficiary and Responsible Individual acknowledge and agree that the Custodial

Account is subject to the provisions of section 4975, which defines certain prohibited transactions. The Depositor, Designated Beneficiary and Responsible Individual acknowledge and agree that the Custodian and the Administrator shall make no determination as to whether any transaction or investment in the Custodial Account is prohibited under section 4975 or under any other state or federal law. The Depositor, Designated Beneficiary and Responsible Individual understand that should the Custodial Account engage in a prohibited transaction, and depending on the type of prohibited transaction, certain assets of the Custodial Account will be deemed to have been distributed and will be subject to taxes as well as possible penalties. The Depositor, Designated Beneficiary and Responsible Individual agree that they will consult with a tax or legal professional of the Depositor’s, Designated Beneficiary’s or Responsible Individual’s choice to ensure that none of the investments in the Custodial Account will constitute a prohibited transaction and that the investments in the Custodial Account comply with all applicable federal and state laws, regulations and requirements.

11.7 Unrelated Business Income Tax: The Depositor, Designated Beneficiary and Responsible Individual acknowledge and agree that the Custodial

Account is subject to the provisions of Internal Revenue Code Sections 511-514 relating to Unrelated Business Taxable Income (UBTI) of tax-exempt organizations. If the Depositor, Designated Beneficiary or Responsible Individual directs the Custodian to make an investment in the Custodial Account which generates UBTI, the Depositor, Designated Beneficiary or Responsible Individual agrees to prepare or have prepared the required IRS Form 990-T tax return, an application for an Employer Identification Number (EIN) for the Custodial Account (if not previously obtained), and any other documents that may be required, and to submit them to the Custodian for filing with the Internal Revenue Service at least ten (10) days prior to the date on which the return is due, along with an appropriate directive authorizing the Custodian to execute the forms on behalf of the Custodial Account and to pay the applicable tax from the assets in the Custodial Account. The Depositor, Designated Beneficiary and Responsible Individual understand and acknowledge that the Custodian and the Administrator do not make any determination of whether or not investments in the Custodial Account generate UBTI; have no duty to and do not monitor whether or not the Custodial Account has incurred UBTI; and do not prepare Form 990- T on behalf of the Custodial Account.

11.8 Disclosures and Voting: The Custodian shall deliver, or cause to be executed and delivered, to the Designated Beneficiary, Depositor or

Responsible Individual all notices, prospectuses, financial statements, proxies and proxy soliciting materials relating to assets credited to the account. The Custodian shall not vote any shares of stock or take any other action, pursuant to such documents, with respect to such assets except upon receipt by the Custodian of adequate written instructions from Designated Beneficiary, Depositor or Responsible Individual.

11.9 Miscellaneous Expenses: In addition to those expenses set out in Section 10.07 of this plan, the Designated Beneficiary, Depositor or

Responsible Individual agrees to pay any and all expenses incurred by the Custodian in connection with the investment of the account, including expenses of preparation and filing any returns and reports with regard to unrelated business income, including taxes and estimated taxes, as well as any transfer taxes incurred in connection with the investment or reinvestment of the assets of the account.

11.10 Valuations: The assets in the Custodial Account shall be valued annually at the end of each calendar year in accordance with section 530(h)

and IRS Notice 2003-53 and other guidance provided by the IRS, but Custodian retains the right to value the assets in the Custodial Account more frequently. In valuing the assets of the Custodial Account for record keeping and government reporting purposes, Custodian will ascertain the fair market value of each investment through utilizing various third-party pricing sources and designated valuation agents. However, Custodian does not guarantee the accuracy of prices obtained from these sources. Where assets are illiquid or their value is not readily ascertainable on either an established exchange or generally recognized market, the valuation is by necessity not a true market value and is merely an estimate of value, and the Depositor, Designated Beneficiary and Responsible Individual agree not to rely on any such valuation for any other purposes. Depositor, Designated Beneficiary and Responsible Individual agree to provide the year end value of any illiquid and/or non-publicly traded investments, which may include without limitation limited partnerships, limited liability companies, privately held stock, real estate investment trusts, hedge funds, real estate, secured and unsecured promissory notes, and any other investments as Custodian shall designate, by no later than the following January 15th. If Custodian does not receive a current year end fair market value by the following January 15th for any such investment, the Custodian shall take appropriate actions to receive the fair market value from an independent third party that specializes in valuations, paying the cost of such valuation from the liquid assets held in the Custodial Account, or in the alternative after having first received the cost of the valuation fro m the Depositor, Designated Beneficiary or Responsible Individual if liquid investments in the Custodial Account are otherwise insufficient. Unless Custodian has received a written fair market valuation to the contrary, promissory notes and privately offered corporate debt will have valuations reflected at the face value shown on the original note or debt instrument, or if the note is subject to an amortization schedule and the amortization schedule has been provided to Custodian by Depositor, Designated Beneficiary or Responsible


Individual, valuation may be shown at the principal amount shown on the amortization schedule as of the end of the previous year. Depositor, Designated Beneficiary, Responsible Individual, and Designated Death Beneficiary agree to indemnify and hold harmless Custodian from any and all losses, expenses, settlements, or claims with regard to investment decisions, distribution values, tax reporting or any other financial impact or consequence relating to or arising from the valuation of assets in the Custodial Account.

11.11 Insurance, Tax and Other Payments: Custodian and Administrator shall not bear or assume any responsibility to notify Depositor, Designated

Beneficiary or Responsible Individual or to secure or maintain any fire, casualty, liability or other insurance coverage, including but not limited to title insurance coverage, on any real or personal property owned in the Custodial Account or on any property which serves as collateral under any mortgage, deed of trust, or other security instrument with respect to any promissory note or other evidence of indebtedness in the Custodial Account. The Depositor, Designated Beneficiary and Responsible Individual acknowledge and agree that it is the responsibility of Depositor, Designated Beneficiary or Responsible Individual to decide what insurance is necessary or appropriate for any investment in the Custodial Account, and to direct Custodian in writing (on a form prescribed by Custodian) to pay the premiums for any such insurance. Custodian and Administrator shall not be responsible for notification or payments of any real estate taxes, homeowners association dues, utilities or other charges with respect to any investment held in the Custodial Account unless Depositor, Designated Beneficiary or Responsible Individual specifically directs the Custodian to pay the same in writing (on a form prescribed by Custodian), and sufficient funds are available to pay the same from the Custodial Account. The Depositor, Designated Beneficiary and Responsible Individual acknowledge and agree that it shall be Depositor’s, or Designated Beneficiary’s or Responsible Individual’s responsibility to provide to Custodian or to ensure that Custodian has received any and all bills for insurance, taxes, homeowners dues, utilities or other amounts due for assets held in the Custodial Account. Furthermore, the Depositor, Designated Beneficiary and Responsible Individual agree that it shall be Depositor’s, Designated Beneficiary’s or Responsible Individual’s responsibility to determine that payments have been made by verifying the payments via Designated Beneficiary’s (or Responsible Individual’s) Custodial Account statements.

Article XII

Miscellaneous Provisions 12.1 Electronic Communications, Signatures, and Records: Subject to any limitations contained in any applicable federal or state law or

regulation, the Depositor, Designated Beneficiary and Responsible Individual acknowledge and agree that the Custodial Account shall be subject to the provisions of the Uniform Electronic Transactions Act, as passed in the state where the Custodian is organized ( South Dakota Codified Law Sections 53-12 et seq.), and the federal Electronic Signature in Global and National Commerce Act (ESIGN Act, as contained in 15 U.S.C. 7001), as those laws pertain to electronic communication, electronic signatures, and electronic storage of Custodial Account records. In lieu of the retention of the original records, Custodian may cause any, or all, of its records, and records at any time in its custody, to be photographed or otherwise reproduced to permanent form, and any such photograph or reproduction shall have the same force and effect as the original thereof and may be admitted in evidence equally with the original.

12.2 Severability: If any provision of this Custodial Account Agreement is found to be illegal, invalid, void or unenforceable, such provision shall be

severed and such illegality or invalidity shall not affect the remaining provisions which shall remain in full force and effect. Neither Depositor’s, Designated Beneficiary’s, Responsible Individual’s or Custodian’s failure to enforce at any time or for any period of time any of the provisions of this Agreement shall be construed as a waiver of such provisions, or Depositor’s, Designated Beneficiary’s, or Responsible Individual’s right or Custodian’s right to enforce each and every such provision.

General Instructions (Section references are to the Internal Revenue Code unless otherwise noted.) Purpose of Form Form 5305-EA is a model custodial account agreement that meets the requirements of section 530(b)(1) and has been pre-approved by the IRS. A Coverdell education savings account (ESA) is established after the form is fully executed by both the Depositor and the Custodian. This account must be created in the United States for the exclusive purpose of paying the qualified elementary, secondary, and higher education expenses of the Designated Beneficiary. If the model account is a trust account, see Form 5305-E, Coverdell Education Savings Trust Account. Do not file Form 5305-EA with the IRS. Instead, the Depositor must keep the completed form in its records. Definitions Custodian. The Custodian must be a bank or savings and loan association, as defined in section 408(n), or any person who has the approval of the IRS to act as Custodian. Any person who may serve as a Custodian of a traditional IRA may serve as the Custodian of a Coverdell ESA. Depositor. The Depositor is the person who establishes the custodial account. Designated Beneficiary. The Designated Beneficiary is the individual on whose behalf the custodial account has been established. Family member. Family members of the Designated Beneficiary include his or her spouse, child , grandchild, sibling, parent, niece or nephew, son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law, and the spouse of any such individual. A first cousin, but not his or her spouse is also a "family member". Responsible Individual. The Responsible Individual, generally, is a parent or guardian of the Designated Beneficiary. However, under certain circumstances, the Responsible Individual may be the Designated Beneficiary. Identification Numbers The Depositor and Designated Beneficiary's social security numbers will serve as their identification numbers. If the Depositor is a nonresident alien and does not have an identification number, write "Foreign" in the block where the number is requested. The Designated Beneficiary's social security number is the identification number of his or her Coverdell ESA. If the Designated Beneficiary is a nonresident alien, the Designated Beneficiary's individual taxpayer identification number is the identification number of his or her Coverdell ESA. An employer identification number (EIN) is required only for a Coverdell ESA for which a return is filed to report unrelated business income. An EIN is required for a common fund created for Coverdell ESAs. Specific Instructions


Note: The age limitation restricting contributions, distributions, rollover contributions, and change of beneficiary are waived for a designated beneficiary with special needs. Article X. Article X and any that follow may incorporate additional provisions that are agreed to by the Depositor and Custodian to complete the agreement. They may include, for example, provisions relating to: definitions, investment powers, voting rights, exculpatory provisions, amendment and termination, removal of the Custodian, Custodian's fees, state law requirements, treatment of excess contributions, and prohibited transactions with the Depositor, Designated Beneficiary, or Responsible Individual, etc. Attach additional pages as necessary. Optional provisions in Article V and Article VI. Form 5305-EA may be reproduced in a manner that provides only those optional provisions offered by the Custodian.


COVERDELL EDUCATION SAVINGS ACCOUNT DISCLOSURE STATEMENT

Coverdell Education Savings Accounts (Coverdell ESAs) were established under the Taxpayer Relief Act effective in 1998. This type of account was originally called an Education Individual Retirement Account and the annual contribution limit per Designated Beneficiary for 1998 through 2001 was $500. Effective for contributions made for tax year 2002, the annual contribution limit is increased to $2,000 per Designated Beneficiary. The Economic Growth and Tax Relief Reconciliation Act increased the annual contribution limit, as well as made other important changes that are described in the following questions and answers. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 extended the changes made to Coverdell ESAs under EGTRRA through 2012. Amounts deposited in the account grow tax-free until distributed, and the Designated Beneficiary will not owe tax on any withdrawal from the account if the Designated Beneficiary's qualified education expenses at an eligible educational institution for the year equal or exceed the amount of the withdrawal. If the Designated Beneficiary does not need the money for educational purposes, the account balance can be rolled over to a Coverdell ESA of certain family members who can use it for their education. Amounts withdrawn from a Coverdell ESA that exceed the Designated Beneficiary's qualified education expenses in a taxable year are generally subject to income tax and to an additional tax of 10 percent.

There are potentially three (or more) parties involved in the establishment of, making contributions to, and directing distributions from the account. These parties are referred to in the following questions and answers, and include the:

Depositor: The Depositor is the initial contributor who establishes the Coverdell ESA by executing the Adoption Agreement and who contributes the initial contribution. Subsequent contributions to the account may be made by the original Depositor or by other eligible contributors. The Depositor may also be the Designated Beneficiary and/or the Responsible Individual.

Designated Beneficiary: The Designated Beneficiary is the individual for whose benefit the Coverdell ESA is established. Except for "special needs designated beneficiaries", no contribution can be made after the Designated Beneficiary's 18th birthday. The Designated Beneficiary may also be the Depositor and/or the Responsible Individual.

Responsible Individual: The Responsible Individual is the individual who generally controls all decisions regarding the account, including authorizing payments from the account. There can be only one Responsible Individual at any time and generally must be a parent or legal guardian of the Designated Beneficiary. However, in certain cases the Designated Beneficiary may automatically become his or her own Responsible Individual. The Responsible Individual may also be the Depositor.

Q1: What is a Coverdell Education Savings Account (Coverdell ESA)?

A1: A Coverdell ESA is a trust or custodial account that is created or organized in the United States exclusively for the purpose of paying the qualified

education expenses of the Designated Beneficiary of the account. The account must be designated as a Coverdell ESA when it is created in order to be treated as a Coverdell ESA for tax purposes.

Q2: For whom may a Coverdell ESA be established?

A2: A Coverdell ESA may be established for the benefit of any child under the age of 18. Contributions to a Coverdell ESA is not permitted after the

Designated Beneficiary reaches his/her 18th birthday.

Q3: Where may an individual open a Coverdell ESA?

A3: An individual may open a Coverdell ESA with any bank, or other financial institution that has been approved to serve as a nonbank trustee or custodian of an individual retirement account (IRA), and the bank or entity is offering Coverdell ESAs.

Q4: When may a taxpayer start contributing to a Coverdell ESA?

A4: A taxpayer may start making contributions on January 1, 1998, or at any time thereafter.

Q5: How much may be contributed to a Coverdell ESA on behalf of a Designated Beneficiary?

A5: For tax years 1998 through 2001, the maximum contribution limit per year was $500 in aggregate contributions made for the benefit of any

Designated Beneficiary. For tax year 2002 and thereafter, the maximum contribution limit per year is $2,000 in aggregate contributions made for the benefit of any Designated Beneficiary. Contributions may be made into a single Coverdell ESA or into multiple Coverdell ESAs for the benefit of any one Designated Beneficiary.

Q6: What happens if more than the maximum annual contribution limit is contributed to a Coverdell ESA on behalf of a Designated Beneficiary for

a particular calendar year?

A6: Aggregate contributions for the benefit of any one Designated Beneficiary in excess of annual limit for a particular calendar year are treated as excess contributions. If the excess contributions (and any earnings attributable to them) are not withdrawn from the ESA that received the excess contribution by May 31st of the calendar year following the calendar year in which the excess was made, the excess contribution is subject to a 6 percent excise tax for each year the excess amount remains in the account. If the excess contributions (and any earnings) are timely withdrawn, no 6 percent excise tax applies. However, any earnings distributed in such a corrective distribution will be taxable to the Designated Beneficiary, but no 10% additional tax applies to the earnings.

Q7: May contributions other than cash be made to a Coverdell ESA?

A7: No. Coverdell ESAs are permitted to accept contributions made in cash only.

Q8: May contributors take a deduction for contributions made to a Coverdell ESA?

A8: No. Contributions to a Coverdell ESA are not deductible. Therefore, contributions to a Coverdell ESA create "basis" in the account. This means that

any distributions that are not used for qualified education expenses are taxable only with respect to any earnings on the contributions.

GENERAL INFORMATION


Q9: Are there any restrictions on who can contribute to a Coverdell ESA?

A9: Any individual may contribute to a Coverdell ESA if the individual's modified adjusted gross income for the taxable year for which the contribution is

made is no more than $95,000 ($190,000 for married taxpayers filing jointly). For purposes of this section, "modified AGI" means the AGI of the taxpayer for the taxable year increased by amounts excluded from gross income under sections 911 (foreign earned income); 931 (income from Guam, American Samoa, or Northern Mariana Islands); and 933 (income from Puerto Rico). The maximum annual contribution per Designated Beneficiary is gradually reduced for individuals with modified adjusted gross income between $95,000 and $110,000 (between $190,000 and $220,000 for married taxpayers filing jointly).

For example, an unmarried taxpayer with modified adjusted gross income of $96,500 could make a maximum contribution for the year per Designated Beneficiary of $1,800 ($110,000 - $96,500 X .1333 = $1,800). A married individual filing jointly with modified adjusted gross income of $215,000 could make a maximum contribution for the year per Designated Beneficiary of $350 ($220,000 - $215,000 X .07 = $350). Taxpayers with modified adjusted gross income above $110,000 ($220,000 for married taxpayers filing jointly) cannot make contributions to anyone's Coverdell ESA.

Q10: May a Designated Beneficiary contribute to his/her own Coverdell ESA?

A10: Yes.

Q11: Does a taxpayer have to be related to the Designated Beneficiary in order to contribute to the Designated Beneficiary's Coverdell ESA?

A11: No.

Q12: Can entities make contributions to the Designated Beneficiary's Coverdell ESA?

A12: Yes. Any entity can make contributions to the Designated Beneficiary's Coverdell ESA without regard to such entity's adjusted gross income. For example, Century Computer Services, Inc. decides to make Coverdell ESA contributions on behalf of any child under the age of 18 of their employees in the amount of $500. Century Computer Services, Inc. qualifies as a contributor regardless of the company's adjusted gross income, but the company cannot take a deduction for such contributions. Also, other contributions up to $1,500 could be made into the same Coverdell ESA or another Coverdell ESA on behalf of any one these employees' children.

Q13: Is the contributor to a Coverdell ESA required to have compensation or earned income in order to make contributions?

A13: No. The contributor (whether an individual or an entity) is not required to have earned income or compensation.

Q14: What is the deadline for making contributions to a Coverdell ESA for a particular tax year?

A14: Beginning for contributions made for tax year 2002, the deadline to make contributions is the tax filing deadline for such year not including extensions. Thus, in most cases, the deadline to make contributions for a tax year is the following April 15th. The contributor should designate in writing to the trustee or custodian the tax year for which the contribution is being made.

Q15: Are there any special reporting requirements for a Coverdell ESA?

A15: Yes. The trustee or custodian will issue an annual Form 5498-ESA to the IRS and to the Designated Beneficiary reporting contributions made for the tax

year, and any rollover contributions or transfers received during the tax year. The trustee or custodian will also issue Form 1099-Q to the IRS and to the Designated Beneficiary whenever distributions or transfers are paid from the account. The Designated Beneficiary is responsible for determining whether or not a distribution is taxable and to file Form 5329 with the IRS if excess contributions have been made to the account or if distributions were made that exceed the qualified education expenses for the year. If a rollover or transfer is made from the Coverdell ESA of one Designated Beneficiary to another eligible family member of the Designated Beneficiary, certain statements must be attached to the tax returns of both the original Designated Beneficiary and the eligible family member to which the account was rolled over or transferred (see Form 1040 instructions). Taxable distributions from a Coverdell ESA are included in gross income on the “Other Income” line of Form 1040. The trustee or custodian is not required to report the taxable amount of any distribution from the ESA, except for earnings that are distributed on a returned contribution. Instead, the trustee or custodian will report the December 31st fair market value on Form 1099-Q. The Designated Beneficiary will use the worksheet in IRS Publication 970 to figure the earnings, basis and taxable amount of any ESA distributions.

Q16: How many Coverdell ESAs may a Designated Beneficiary have?

A16: There is no limit on the number of Coverdell ESAs that may be established for a particular Designated Beneficiary. However, for any given taxable year

the total aggregate contributions to all the accounts for a particular Designated Beneficiary may not exceed the annual contribution limit described in Q&A 5.

Q17: May a Designated Beneficiary take a tax-free withdrawal from a Coverdell ESA to pay qualified education expenses if the Designated

Beneficiary is enrolled less than full-time at an eligible educational institution?

A17: Yes. Whether the Designated Beneficiary is enrolled full-time, half-time, or less than half-time, he/she may take a tax-free withdrawal to pay qualified education expenses.

Q18: What happens when a Designated Beneficiary withdraws assets from a Coverdell ESA to pay for qualified education expenses?

A18: Generally, the withdrawal is tax-free to the Designated Beneficiary to the extent the amount of the withdrawal does not exceed the Designated

Beneficiary's qualified education expenses.

Q19: What are "qualified education expenses"?

A19: "Qualified education expenses" mean qualified higher education expenses for tuition, fees, books, supplies, and equipment required for the enrollment or attendance of the Designated Beneficiary at an eligible educational institution. Qualified higher education expenses also include room and board (generally the school's posted room and board charge, or $2,500 per year for students living off-campus and not at home) if the Designated Beneficiary is at least a half-time student at an eligible educational institution. A student will be considered to be enrolled at least half-


time if the student is enrolled for at least half the full-time academic workload for the course of study the student is pursuing as determined under the standards of the institution where the student is enrolled.

The standards for determining whether a student is enrolled at least half-time are the same as those used for the Hope Scholarship Credit. A student is eligible for the Hope Scholarship Credit if: (1) for at least one academic period (e.g., semester, trimester, quarter) beginning during the calendar year, the student is enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential and is enrolled in one of the first two years of postsecondary education, and (2) the student is free of any conviction for a Federal or State felony offense consisting of the possession or distribution of a controlled substance. For purposes of the Hope Scholarship Credit, a student will be considered to be enrolled at least half-time if the student is enrolled for at least half the full-time academic workload for the course of study the student is pursuing as determined under the standards of the institution where the student is enrolled. The institution's standard for a full-time workload must equal or exceed the standards established by the Department of Education under Higher Education Act and set forth in 34 CFR 674.2(b).

Beginning in 2002, qualified education expenses also include qualified elementary and secondary education expenses for tuition, fees, academic tutoring, special needs services in the case of a special needs beneficiary, books, supplies, and other equipment which are incurred in connection with the enrollment or attendance of the Designated Beneficiary as an elementary or secondary school student at a public, private or religious school. Such expenses also include room and board, uniforms, transportation, and supplementary items and services (including extended day programs) which are required or provided by a public, private or religious school in connection with such enrollment or attendance, and expenses for the purchase of any computer technology or equipment or Internet access and related services, if such technology, equipment, or services are to be used by the Designated Beneficiary and the Designated Beneficiary's family during any of the years the Designated Beneficiary is in school.

Qualified education expenses also include amounts contributed to a qualified state tuition program. Also, qualified education expenses are reduced by any amount provided by scholarship, educational assistance allowance, or any other payment (other than a gift or bequest) which is excludable from gross income under any law of the United States.

Q20: What is an eligible educational institution?

A20: For purposes of qualified higher education expenses, an eligible educational institution is any college, university, vocational school, or other

postsecondary educational institution that is described in section 481 of the Higher Education Act of 1965 (20 U.S.C. 1088) and, therefore, eligible to participate in the student aid programs administered by the Department of Education. This category includes virtually all accredited public, nonprofit, and proprietary postsecondary institutions. (The same eligibility requirements for institutions apply for the Hope Scholarship Credit, the Lifetime Learning Credit, and early withdrawals from IRAs for qualified higher education expenses).

For purposes of elementary and secondary education expenses, an eligible education institution means any school which provides elementary education or secondary education (kindergarten through grade 12), as determined under state law.

Q21: What happens if a Designated Beneficiary withdraws an amount from a Coverdell ESA but does not have any qualified education expenses to

pay in the taxable year he/she makes the withdrawal?

A21: Generally, if a Designated Beneficiary withdraws an amount from a Coverdell ESA and does not have any qualified education expenses during the taxable year, a portion of the distribution is taxable. The taxable portion is the portion that represents earnings that have accumulated tax-free in the account. The taxable portion of the distribution is also subject to a 10 percent additional tax unless an exception applies. Form 5329 is required to be filed with the IRS by the Designated Beneficiary. The 10 percent additional tax does not apply to distributions made: (1) to a death beneficiary (or to the estate of the Designated Beneficiary) after the death of the Designated Beneficiary; (2) attributable to the Designated Beneficiary become disabled within the meaning of section 72(m)(7) of the Internal Revenue Code; or (3) made on account of a scholarship, allowance or payment to the extent such payment or distribution does not exceed the amount of such scholarship, allowance or payment.

Q22: Is a distribution from a Coverdell ESA taxable if the distribution is contributed to another Coverdell ESA?

A22: Any amount distributed from a Coverdell ESA and rolled over to another Coverdell ESA for the benefit of the same Designated Beneficiary or certain

members of the Designated Beneficiary's family is not taxable. An amount is rolled over if it is paid to another Coverdell ESA on a date within 60 days after the date of the distribution. Members of the Designated Beneficiary's family include the Designated Beneficiary's spouse, children, grandchildren, sibling, parent, niece or nephew, son-in-law, daughter-in-law, father-in-law, mother-in-law, or sister-in-law, and the spouse of any such individual. A first cousin, but not his or her spouse is also a family member of the Designated Beneficiary. The annual contribution limit to Coverdell ESAs does not apply to these rollover contributions. For example, an older brother who has $5,000 left in his Coverdell ESA after he no longer needs the account for education purposes can roll over the full $5,000 balance to a Coverdell ESA for his younger sister who is still in high school without paying any tax on the transfer or rollover. The eligible family member to whose Coverdell ESA such amount is rolled over or transferred must be under the age of 30. Only one rollover between Coverdell ESAs is permitted during a 12-month period.

Q23: What happens to the assets remaining in a Coverdell ESA after the Designated Beneficiary finishes his/her education?

A23: There are two options. The amount remaining in the account may be withdrawn for the Designated Beneficiary. The Designated Beneficiary will be

subject to both income tax and the additional 10 percent tax on the portion of the amount withdrawn that represents earnings if the Designated Beneficiary does not have any qualified education expenses in the same taxable year he/she makes the withdrawal. Alternatively, if the amount in the Designated Beneficiary's Coverdell ESA is withdrawn and rolled over (or transferred) to another Coverdell ESA for the benefit of an eligible member of the Designated Beneficiary's family, the amount rolled over or transferred will not be taxable.

Q24: Rather than rolling over money from one Coverdell ESA to another, may the Designated Beneficiary of the account be changed from one

Designated Beneficiary to another without triggering a tax?

A24: Yes, provided: (1) the terms of the particular trust or custodial account permit a change in designated beneficiaries, and (2) the new Designated Beneficiary has not attained age 30 and is a member of the previous Designated Beneficiary's family.

Q25: May a student or the student's parents claim the Hope Scholarship Credit or Lifetime Learning Credit for the students's expenses in a

taxable year in which the student receives money from a Coverdell ESA on a tax-free basis?

A25: Yes, effective for tax year 2002. If a student is receiving a tax-free distribution from a Coverdell ESA in a particular taxable year (beginning in 2002), the student's expenses may generally be claimed as the basis for a Hope Scholarship Credit or Lifetime Learning Credit for that same year, provided however that the distributed amount from the Coverdell ESA is not used for the same educational purposes as the tax credit.


Q26: May contributions be made to both a qualified state tuition program and a Coverdell ESA on behalf of the same Designated Beneficiary in the same taxable year?

A26: Yes, beginning in tax year 2002. The excise tax prohibiting contributions to both a Coverdell ESA and a qualified state tuition program was repealed for

2002 and forward. Therefore, contributions may be made to a Coverdell ESA on behalf of a Designated Beneficiary during the same taxable year in which any contributions are made to a qualified state tuition program on behalf of the same Designated Beneficiary. However, if distributions from a Coverdell ESA and a qualified state tuition program exceed the Designated Beneficiary's qualified education expenses for the year, the Designated Beneficiary is required to allocate the expenses between the distributions to determine the amount includible in gross income, if any.

Q27: What happens to the assets remaining in the Coverdell ESA after the death of the Designated Beneficiary?

A27: Generally within 30 days after the death of the Designated Beneficiary, distribution is made to the Designated Beneficiary's estate; or the

Responsible Individual may change the name of the Designated Beneficiary to an eligible family member under the age of 30 of the original Designated Beneficiary, if the agreement permits. Alternatively, if the agreement permits the naming of a Designated Death Beneficiary, any remaining balance in the account on the date of death of the Designated Beneficiary shall become payable to such Designated Death Beneficiary. If the Designated Death Beneficiary is not an eligible family member of the Designated Beneficiary, the entire balance must be distributed within 30 days of the death of the Designated Beneficiary. If the Designated Death Beneficiary is an eligible family member of the Designated Beneficiary, the entire balance may be rolled over or transferred tax free to a Coverdell ESA on behalf of such Designated Death Beneficiary. Any distributions paid after the date of death of the Designated Beneficiary are taxable to the extent such distribution represents earnings, unless the account is rolled over or transferred to a Coverdell ESA on behalf of an eligible family member of the Designated Beneficiary.

Q28: What happens to the assets remaining in the Coverdell ESA after the Designated Beneficiary attains the age of 30?

A28: Any balance remaining in the Coverdell ESA when the Designated Beneficiary attains the age of 30 must be distributed to such Designated

Beneficiary within 30 days. However, if permitted under the Agreement, the remaining balance may be rolled over or transferred to a Coverdell ESA on behalf of an eligible family member.

Q29: Do the age requirements described above apply to "special needs" Designated Beneficiaries?

A29: No. A Coverdell ESA established on behalf of any Designated Beneficiary with special needs (as determined by IRS regulations) may continue to

receive contributions after the Designated Beneficiary's 18th birthday. In addition, any remaining balance in a Coverdell ESA on behalf of any Designated Beneficiary with special needs is not required to be distributed within 30 days after the Designated Beneficiary attains the age of 30.

Q30: Does the Internal Revenue Service provide a publication that contains more information on Coverdell ESAs?

A30: Yes. IRS Publication 970, Tax Benefits for Higher Education, contains information regarding the Coverdell ESA, as well as claiming the Hope Credit,

Lifetime Learning Credit, student loans, penalty-free withdrawals from IRAs for certain education expenses, employer-provided educational assistance and qualified state tuition programs. The Custodian recommends that the Depositor, Designated Beneficiary and/or Responsible Individual read Publication 970 before making contributions to or taking distributions from a Coverdell ESA. Publication 970 can be downloaded from the IRS web site at www.irs.gov.

Q.31: Can payments received from a military death gratuity or a payment from Servicemember’s Group Life Insurance (SGLI) be contributed to a Coverdell ESA?

A.31: Yes, if you received a military death gratuity or a payment from the SGLI after October 6, 2001, you may roll over all or part of the amount received to one

or more Coverdell ESAs for the benefit of members of the beneficiary’s family. Such payments are made to an eligible survivor upon the death of a member of the armed forces. The contribution to a Coverdell ESA from survivor benefits received after June 16, 2008, cannot be made later than 1 year after the date on which you receive the gratuity or SGLI payment. If you received survivor benefits before June 17, 2008, with respect to a death from injury occurring after October 6, 2001, you could have contributed to a Coverdell ESA no later than June 17, 2009. The amount contributed from the survivor benefits is treated as part of your basis in the Coverdell ESA and will not be taxed when distributed. Also, the one rollover per Coverdell ESA during a 12-month period does not apply to a military death gratuity or SGLI payment.

Q.32 Are the changes to the Coverdell ESA rules made under the Economic Growth and Tax Relief Reconciliation Act of 2001 that were effective in

2002 subject to EGTRRA’s sunset provision?

A.32 Yes. Certain rules were scheduled to expire after 2010 as part of EGTRRA’s sunset provision. These rules included: the maximum annual Coverdell ESA contribution; the AGI limits of the contributor; the definition of qualified education expenses; the deadline for making a contribution for a given year; the coordination of the rules between Coverdell ESAs and the Hope Scholarship Credit or Lifetime Learning Credit. However, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 extended the changes made to Coverdell ESAs under EGTRRA through 2012.

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